Helicopter Money

Milton Friedman

What is an objective monetary system?

Objectivity requires applying reason to reality.

1. The facts of what really is there and what really happens must be the base of an objective view of anything. While expectations and wishes can distort our plans of action in the short run, reality will eventually override them. The laws of physics and economics cannot be repealed. They cannot be ignored without paying a heavy price. Look around you at all that exists. Each existing thing has a specific identity and causality (capable of doing certain things if put into motion or affected in some way).
2. The laws of logic must be applied in analysis of those facts. A thing cannot be its opposite at the same time in the same respect. You cannot eat your cake and have it too. Objectivity is the discovery by your consciousness, using the laws of logic, the specific identities of existing things, and what they can cause. Once you have that objective knowledge (limited, of course, by your context), you are prepared to succeed in your life's plans.

Money as a medium of exchange and store of value needs to be objective. It needs to be based on fact, traceable back to goods that have market values in their own right, whether it is usability for industrial or decorative purposes. Money needs to be durable, divisible, easy to transport and of real value in some human productive activity (including decorative uses). Paper has a negligible value and is easily destroyed, regardless of the ink or threads embedded in it.

What happens when statism determines money?

Statism is “concentration of economic controls and planning in the hands of a highly centralized government often extending to government ownership of industry” (Merriam Webster Dictionary). “Statism – in fact and in principle – is nothing more than gang rule. A dictatorship is a gang devoted to looting the effort of the productive citizens of its own country.” Ayn Rand, “The Roots of War” in Capitalism the Unknown Ideal, the New American Library, New York , 1966, p 36. She also described statism as measured in degrees by how far the country is broken up into rival gangs, setting men against one another.

The surest way to kill an objective monetary system is statism, and the top gang is bankers. If it does not clip coins in order to enrich illegitimate government, it issues paper certificates that eventually have its backing in real assets removed. The money begins to represent the state's ability to tax, its ability to borrow more.

It eventually simply stands for debt. The purest form is the U.S. Treasury long bond (30-year Treasury bond). This is followed by the 2-, 3-, 5- and 10-year notes, and the 1-day to 52-week Treasury bills. What do you get when you sell one? You get Federal Reserve Notes (dollar bills). What can you get from the government for those dollars? Debt in the form of the above notes, bills and bonds. They all represent debt. None are real assets. They are not objective money.

Money Supply Doubles

As of December 1, 2008 the United States money supply stood at $7.9 trillion, according to the 12/01/2008 Barron's. (page M61). On top of that, the San Francisco Chronicle reports the government economic bailout could top $8.5 trillion.

A loaf of bread that costs $5.00 today will cost over $10. It will not happen all at once. Your household income is not likely to rise as fast, since employers stick close to officially reported CPI, which right now is about five percent. You may expect that as a cost of living adjustment, plus one to five percent per year for above expectations performance and skill improvements. Here is a table from the Economic Policy Institute:

Prices for goods will double in the next two to three years (100%), while income will grow a total of twenty percent (20%). Moreover, this could put you in a new tax bracket!

The news stories repeatedly tell us that the banks that are to receive the first $700 billion in bailout money have barely started using it to make new loans. The rest of the bailout will also tend to get stuck for a while in the system, until qualified borrowers come in. The new money being added to the economy is not actually “printed” until it passes on to the end users who use it as operating capital or as funds to expand business.

Another delay happens that is crucial: every first party and perhaps a few secondary ones receiving bailout money meets a market where prices have not changed. The market still has five-dollar bread. However, according to Safehaven , in about 3 years, the additional infusion of credit will spread to Main Street, allowing people to demand more pay, where people like you and I will see it as an opportunity to buy more bread. Moreover, when everyone in town tries to buy more bread and the bakery has limited capacity, the baker is likely to hike prices.

Market Prices of Goods Double

In the end the prices of everything else, ceteris paribus , will tend to double. Tenderloin will soon be $40 per pound, gasoline $6 per gallon and houses $500,000 to $1 million.

Once the bailout money actually starts being used for loans, it does not stop moving. Each time it changes hands, it is parked for a while in a bank account. That next bank may lend up to 90% of it to others. That continues about eight to ten times. The end result is that the initial $700 billion adds $7 trillion spending power to the economy. Moreover the banks are earning interest on all of it.

By the time you are likely to touch any of it prices of goods have doubled and your income has risen twenty percent. Sweet, huh?

What makes up the bailout? That San Francisco Chronicle presented the following breakdown:

Follow the $8.5 trillion: Breakdown of the government's rescue funds

Source: Federal Reserve; Federal deposit Insurance Corporation; Federal Housing Administration; Treasury Department Bloomberg

San Francisco Chronicle

Is this a problem?

So the government increases the national debt by almost 85 percent, is this a problem? Can it ever be repaid? Some say that the government will soon have no choice but to default, to declare the bonds outstanding as worthless. I don't think so.

Yes, it will be repaid. It will be repaid to the bond-buyers with dollars worth half of what they are worth today. If the inflation rate is over seven percent (7%) according to my source for such data rather than the Labor Department, Shadow Government Statistics , the dollar will lose half its value in about ten years ($0.50). The current injection of new money via the Bailout is likely to shoot inflation to double that seven percent, or more. Should all of that debt end up in 30-year bonds, the dollar will go on to lose half again twice, first today's two bits ($0.25) and then one bit ($0.125). By repaying its debt in this way the government carries out stealth default.

Your source of fixed income becomes worthless. Your income will not keep up with that 7% inflation. Since the Federal Reserve Bank was created in 1914, the dollar has already lost 95% of its value through continual increases in the money supply, money inflation. What we see is price inflation: what cost pennies in 1914 now costs several dollars.

All of this is happening because we allowed replacement of gold and silver as money with a non-objective money. On top of all that, the government, with the help of the money center banks, is making the dollar look good by a couple of other tricks. Less than a month ago the Federal Reserve announced a new agreement among central banks of several countries to do Swaps , which enables us to pump a lot of dollars to other countries around the world. What the Fed did not say is that in exchange for those dollars we receive a gob of other currencies. What do we do with them? Buy dollars! This drives up the dollar. Secondly, the money center banks have been engaging for months (if not years) in selling gold . This includes gold futures, being there is doubt about the gold holdings that might have run out. This also drives up the dollar. The dollar looks pretty good now (in the 80s), compared to last summer (in the low 70s). Appearances are deceiving; however, as we know the real value is falling.

What do we do?

For our own individual sakes we should use up dollars instead of sitting on them, by buying real assets. We should buy real property and precious metals.

We should also become activists, working to create an objective monetary system, where gold is money and certificates used as money substitutes stand for real assets (gold). And lastly, we should return banking to a comparably objective system, where banks lend out only out of equity, out of what they own free and clear – without fractional reserves. Put an end to the Federal Reserve.